USU ECN exam 3 (bond)

suppose inflation is above the Fed's target. To lower inflation, the Fed should

increase interest rates, shifting the aggregate demand curve to the left

According to the liquidity preference theory, an increase in the overall price level of 10%

increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded

The position of the long-run aggregate supply curve

is determined by the resources and technology available to the economy

The source of the supply of loanable funds

is saving and the source of demand for loanable funds is investment.

A 1977 amendment to the Federal Reserve Act of 1913 says the Fed should "promote" which of the following goals?

price stability, maximum employment, and moderate long-term interest rates

If the central bank increases the money supply, then in the short run prices

rise unemployment falls

Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could

sell bonds to raise interest rates

If, at some interest rate, the quantity of money supplied is less than the quantity of money demanded, people will desire to

sell interest-bearing assets, causing the interest rate to increase

In recent years the federal open market committee has focused on a target for..

the federal funds rate

The idea that expansionary fiscal policy has a positive effect on investment is known as

the investment accelerator

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?

the multiplier effect

The long-run aggregate supply curve shifts right if: A. immigration from abroad increases. B. the capital stock increases. C. technology advances.

All of them

Control the Supply of Money

An important function of the US federal reserve

Soon after he became the chairman of the Federal Reserve System in 1979, Paul Volcker embarked on a course

a disinflation

In the 1970s, the Fed accommodated a(n)

adverse supply shock and so contributed to higher inflation

If the stock market crashes, then

aggregate demand decreases, which the Fed could offset by increasing the money supply.

Suppose businesses in general believe that the economy is likely to head into recession and so they reduce capital purchases. Their reaction would initially shift

aggregate demand left

To stabilize interest rates, the Federal Reserve will respond to an increase in money demand by

buying government bonds, which increases the supply of money

The reserve ratio is 10 percent, banks do not hold excess reserves, and people hold only deposits and no currency. When the Fed sells $20 million worth of bonds to the public, bank reserves

decrease by $20 million and the money supply eventually decreases by $200 million

What actions could be taken to stabilize output in response to a large decrease in U.S. net exports?

decrease taxes or increase the money supply

Suppose there is an increase in government spending. To stabilize output, the Federal Reserve would

decrease the money supply

Suppose there was a large increase in net exports. If the Fed wanted to stabilize output, it could

decrease the money supply, which will increase interest rates

According to the aggregate demand and aggregate supply model, in the long run a decrease in the money supply

decrease the price level but does not change real GDP

The interest-rate effect depends on?

depends on the idea that decreases in interest rates increase the quantity of goods and services demanded

Which of the following increases inflation and reduces unemployment in the short run?

either an increase in government expenditures or an increase in the money supply

the national debt

exists because of past government budget deficits

If people decide to hold more currency relative to deposits, the money supply will?

fall The larger the ratio is, the less the money supply falls

The Federal Reserve was created

in 1913 by Congress

Which of the following policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment?

increase government expenditures

Suppose the MPC is 0.60. Assume there are no crowding out or investment accelerator effects. If the government increases expenditures by $200 billion, then by how much does aggregate demand shift to the right?

$500 billion

open market purchase of bonds

-increases the number of dollars in the hands of the public -decreases the number of bonds in the hands of the public

If the marginal propensity to consume is 0, then the multiplier is

1

If the Fed reduces inflation 2 percentage points and this makes output fall 4 percentage points and unemployment rise 3 percentage points for one year, the sacrifice ratio is

2

In a certain economy, when income is $500, consumer spending is $375. The value of the multiplier for this economy is 5. It follows that, when income is $510, consumer spending is

383$

An increase in government expenditures increases the interest rate and so reduces investment spending.

Crowding-out effect

Suppose banks decide to hold fewer excess reserves relative to deposits. Other things the same, this action will cause the money supply to?

Money supply to rise To reduce the impact of this the Fed could sell Treasury bonds.

US Treasury Bills

Not included in M1 or M2

You observe a closed economy that has a government deficit and positive investment. Which of the following is correct?

Private saving is positive; public saving is negative

suppose unemployment is above the Fed's target. To lower unemployment, the Fed should

Reduce interest rates, shifting the aggregate demand curve to the right

Which of the following could explain a decrease in the equilibrium interest rate and in the equilibrium quantity of loanable funds?

The demand for loanable funds shifted leftward

In which of the following cases does the aggregate-demand curve shift to the right?

The money supply increases, causing the interest rate to fall

When measuring and recording economics, money is used as the

Unit of Account

he price level rises in the short run if

aggregate demand shifts right or aggregate supply shifts left

Which of the following results in higher inflation and higher unemployment in the short run?

an adverse supply shock such as an increase in the price of oil

A reduction in personal income taxes increases aggregate demand through

an increase in personal consumption

The members of the Federal Reserve Board of governors are?

appointed by the president and confirmed by the US senate

The Federal Funds rate is the interest rate

banks charge each other for short-term loans

If the interest rate is above the Fed's target, the Fed should

buy bonds to increase the money supply

When the price level falls the quantity of

consumption goods demanded and the quantity of net exports demanded both rise

People who buy stock in a corporation such as General Electric become

part owners of General Electric, so the benefits of holding the stock depend on General Electric's profits

First National Bank (FNB) has a reserve ratio of 20 percent, a required reserve ratio of 10 percent, and deposits of $1,000. If FNB receives an additional deposit of $100, then before it makes any new loans

it has required reserves of $110 and holds excess reserves of $190

If a bank desires to hold no excess reserves, the reserve requirement is 8 percent, and it receives a new deposit of $500

it will be able to make a new loan of up to $492

The rational expectations theory suggests that

lowering inflation can be accomplished with little economic costs

In the long run, an increase in the stock of human capital

makes the price level fall, while increases in the money supply make prices rise

The primary economic function of the financial system is to

match one person's saving with another person's investment

If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to hold

more reserves, the reserve ratio will rise

Other things the same, if technology increases, then in the long run

output is higher and prices are lower

Suppose that next year, the central bank plans to increase the money supply. According to the rational expectations theory, if the public correctly anticipates this, then

the short-run aggregate supply curve will shift left, and unemployment will remain unchanged.

An increase in the expected price level shifts the

the short-run but not the long-run aggregate supply curve left.

M1 includes

traveler's checks

Which of the following typically rises during a recession? investment unemployment tax revenues new home construction

unemployment

If output is above its natural rate, then according to sticky-wage theory

workers will bargain for higher wages. In response to the higher wages firms will produce less at any given price level